Do NAFTA Cases Shed Light on CAFTA Issues?

The North American Free-Trade Agreement (NAFTA), a pact among the United States, Mexico and Canada, has a section, Chapter 11, that defines investor rights and sets up a similar framework for international disputes as Chapter 10 of the much-debated Central American Free-Trade Agreement (CAFTA).

“CAFTA’s investment chapter is just as bad as NAFTA’s – except where it’s worse,” said Todd Tucker, Research Director of the Washington, D.C.-based organization Public Citizen, an anti-CAFTA lobby group founded by U.S. environmentalist and consumer rights advocate Ralph Nader.

Tucker said CAFTA’s Chapter 10, which covers investment, adds to the definition of what can be considered investment that merits compensation if placed at risk by government action or inaction. The chapter says investors who assume risk with “expectationof gain or profit” can seek compensation for losses from government actions. He said CAFTA also adds that “licenses, authorizations and permits” are considered covered investments. Since those are often handled by local governments, “CAFTA is likely to expose many more local Central American government decisions such as those regarding zoning, building permits and licensing of establishments.”

The Tico Times contacted the U.S. Embassy in San José to discuss this issue, but officials declined to comment.

Alberto Trejos, the former Foreign Minister who negotiated CAFTA for Costa Rica, said the autonomy of all countries is limited by these types of agreements, which is apparent by the fact that under NAFTA, a slew of cases have been filed by Mexican and Canadian investors against the U.S. government.

Under CAFTA, “U.S. investors gain in other countries and Costa Rican investors gain in other countries,” he said of Chapter 10.

“The autonomy of an individual or entity to do what they please is somewhat limited by a contract it enters voluntarily. You limit your behavior in some ways by them agreeing to limit theirs in other ways,” he said.

Agreements such as CAFTA put pressure on both countries to enforce their own laws, he said, adding that it “isn’t a bad thing.”

He said he doubts that “ordinary, nondiscriminatory” delays involved in Costa Rica’s slow bureaucracy will trigger arbitration suits against the government of Costa Rica under CAFTA.

The following are excerpts from a Global Trade Watch report outlining NAFTA cases published by Public Citizen in 2005: In 1997, U.S. landfill company Metalclad challenged a Mexican municipality’s refusal of a construction permit for a toxic waste dump and the governor’s declaration of an ecological preserve on lands surrounding the site. The case sought $90 million in damages.

In August 2000, a NAFTA arbitration tribunal ruled that the denial of the dump’s construction permit and the creation of an ecological reserve are an “indirect expropriation” and that Mexico violated the minimum standard of treatment guaranteed foreign investors because the firm was not granted a “clear and predictable” regulatory framework.

In October 2000, the Mexican government challenged the NAFTA ruling in Canadian court, alleging arbitral error. A Canadian judge ruled that the tribunal erred in part by importing transparency requirements of NAFTA’s Chapter 18 into Chapter 11 and reduced the award by $1 million. Metalclad was paid $15.6 million. In 2004, the Mexican federal government’s effort to hold the state government financially responsible failed in Mexico’s Supreme Court.

In a 1999 case, U.S. cigarette exporter Karpa challenged the denial of an export tax rebate by the Mexican government.

The NAFTA tribunal rejected its expropriation claim in December 2002 but upheld the company’s claim of discrimination after the Mexican government failed to provide evidence that the firm was being treated similarly to Mexican firms in “like circumstances.”

Karpa was paid $1.5 million by the government of Mexico. Karpa attempted to bring its case before a Canadian court, but a judge dismissed it.

A slew of individual investors or small groups of U.S. investors or landowners have challenged the Mexican government. In one case,U.S. landowners are challenging for $75 million a Mexican court ruling that the developer who sold them property did not own land and therefore could not convey it.

In another, a U.S. citizen is challenging for $1.5 million the government confiscation of vacation property he alleges to be his in BajaCalifornia,Mexico. In another case, 17 water rights holders in the United States challenged for $550 million Mexico’s alleged failure to implement a 1944 water-sharing treaty governing water in the Rio Grande along the U.S.-Mexico border. Arbitration hasn’t begun in any of these cases.

In another pending case, the Canadian company Methanex, which produces methanol, a chemical component of the gasoline additive MTBE, is challenging the U.S. state of California’s phase-out of the additive, which has been found to be contaminating drinking water throughout the state.

In August 2002, a jurisdictional ruling stated that because Methanex produces only a component ingredient of MTBE, not the actual product, the company is too “distant” from the MTBE ban to qualify as a firm harmed by it, suggesting that certain MTBE producers may be qualified to bring similar suits under NAFTA. Methanex is allowed to resubmit a claim to demonstrate how the MTBE ban was specifically directed toward methanol producers instead of merely affecting them. To date, the U.S. government has reportedly spent $3 million on legal defense on this case.